Published 04 July 2018, The Daily Tribune

The employer, in the exercise of its management prerogative, may insist on an agreement with the employee for certain prohibitions to take effect after the termination of their employer-employee relationship. For instance, the employer may prohibit the employee from starting a similar business, engaging in a profession or trade or simply, working in an entity engaged in a competing business. This kind of stipulation is widely known as the, “Non-Compete Clause”, “Non-Involvement Stipulation”, or “Covenant Not to Compete Clause.”

The non-compete clause aims to preclude the resigned employee from appropriating and exploiting sensitive information, like trade secrets, customer/client lists, upcoming products and similar confidential proprietary information to the prejudice of the employer. However, one must exercise utmost care in drafting such clause as an overbroad  non-compete clause may be void for being unreasonable and in restraint of trade. The question now is, what is the nature and extent of a non-compete clause to pass legal muster ?

Let us take the case of Daisy. She  worked for “ ABC Plans “, a pre-need company as Senior Assistant Vice-President and Territorial Operations Head in charge of its Hongkong and Asean operations under a 5-year employment contract which contains a clause, a part of which reads: “in case of separation from the Company, Daisy shall not, for the next two years thereafter, engage in or be involved in the same business or belonging to the same pre-need industry as the Company.” However, shortly after two years from her employment with ABC Plans, Daisy stopped reporting for work and assumed the position of Vice-President for Sales in XYZ Pension Plans Professional., a similar pre-need company. Consequently, ABC Plans  sued Daisy for damages in view of the latter’s violation of her employment contract.

In her defense, Daisy argued that the non-compete clause was unenforceable for being against public order or public policy. She claimed, among others, that ABC Plans did not invest in her training or improvement and a strict application of such clause would amount to a deprivation of her right to engage in the only work she knew.

In upholding the validity of the non-involvement clause, the High Court ruled that “a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade and place.” Applying said parameters, the Court held that Daisy’s involvement clause has a time limit: two years from the time her employment ends with ABC Plans. Further, it is also limited as to trade, since it only prohibits Daisy from engaging in any pre-need business akin to ABC Plans. The Court  continued, “more significantly, since Daisy was the Senior Assistant Vice-President and Territorial Operations Head in charge of ABC Plans in charge of its Hongkong and Asean opeations, she had been privy to confidential and highly sensitive marketing strategies or ABC Plans’ business. To allow Daisy to engage in a rival business soon after she leaves would make the Company’s trade secrets vulnerable especially in a highly competitive marketing environment.” As penalty for violating the non-compete clause, the Court ordered Daisy to pay Php100,000 as liquidated damages. ( Daisy B. Tiu v. Platinum Plans Philippines, Inc., G.R. No. 163512, 28 February 2007 ).

From the Court’s pronouncement, it may  be concluded that a non-compete clause is valid provided there is a limitation upon either time or place and the restraint upon one party is reasonable such that the restraint is not greater than the protection the other party requires.To deter employee transfers to a competing entity, not a few employers impose huge penalty amount in case of breach. In case of suit, employers have to defend the reasonableness of the amount, taking into account the sensitive nature of the position, the element of voluntariness when the contract was entered into and the extent of actual or potential damage the breach may cause.  Ultimately though, similar to the validity of the non-compete clause, the reasonableness of the penalty depends on the sound judgment of the court.

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